MICROECONOMICS

Question 1

The word economy comes from the Greek word for “______________”

Answer 1

“one who manages a household.”

Question 2

The management of society’s resources is important because resources are ______

Answer 2

scarce

Question 3

means that society has limited resources and therefore cannot produce all the goods and services people wish to have.

Answer 3

Scarcity

Question 4

is the study of how society manages its scarce resources.

Answer 4

Economics

Question 5

therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings.
-also study how people interact with one another

Answer 5

Economists

Question 6

TEN PRINCIPLES OF ECONOMICS

Answer 6

PRINCIPLE #1: PEOPLE FACE TRADEOFFS
PRINCIPLE #2: THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT
PRINCIPLE #3: RATIONAL PEOPLE THINK AT THE MARGIN
PRINCIPLE #4: PEOPLE RESPOND TO INCENTIVES
PRINCIPLE #5: TRADE CAN MAKE EVERYONE BETTER OFF
PRINCIPLE #6: MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE ECONOMIC ACTIVITY
PRINCIPLE #7: GOVERNMENTS CAN SOMETIMES IMPROVE MARKET OUTCOMES
PRINCIPLE #8: A COUNTRY’S STANDARD OF LIVING DEPENDS ON ITS ABILITY TO PRODUCE GOODS AND SERVICES
PRINCIPLE #9: PRICES RISE WHEN THE GOVERNMENT PRINTS TOO MUCH MONEY
PRINCIPLE #10: SOCIETY FACES A SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT

Question 7

Under this principle, the first lesson to decision making is: “There is no such thing as a free lunch.” To get one thing that we like, we usually have to give up another thing that we like. Making decisions requires trading off one goal against another.

Answer 7

PRINCIPLE #1: PEOPLE FACE TRADEOFFS

Question 8

tradeoff society faces is between ________ and ______

Answer 8

Efficiency and Equity

Question 9

means that society is getting the most it can from its scarce resources.
-refers to the size of the economic pie

Answer 9

Efficiency

Question 10

means that the benefits of those resources are distributed fairly among society’s members.
-refers to how the pie is divided

Answer 10

Equity

Question 11

Because people face tradeoffs, making decisions requires comparing the costs and benefits of alternative courses of action.

Answer 11

PRINCIPLE #2: THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT

Question 11

Because people face tradeoffs, making decisions requires comparing the costs and benefits of alternative courses of action.

Answer 11

PRINCIPLE #2: THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT

Question 12

The ____________ of an item is what you give up to get that item.

Answer 12

opportunity cost

Question 13

Economists use the term marginal changes to describe small incremental adjustments to an existing plan of action.

Answer 13

PRINCIPLE #3: RATIONAL PEOPLE THINK AT THE MARGIN

Question 14

margin means

Answer 14

edge

Question 15

are adjustments around the edges of what you are doing

Answer 15

marginal changes

Question 16

is something that induces a person to act, such as the prospect of a punishment or a reward. Because rational people make decisions by comparing costs and benefits, they respond to incentives. People make decisions by comparing costs and benefits, their behavior may change when the costs or benefits change. That is, people respond to incentives.

Answer 16

PRINCIPLE #4: PEOPLE RESPOND TO INCENTIVES

Question 17

An _________ is something that induces a person to act, such as the prospect of a punishment or a reward.

Answer 17

incentive

Question 18

Trade allows each person to specialize in the activities he or she does best, whether it is farming, sewing, or home building.

Answer 18

PRINCIPLE #5: TRADE CAN MAKE EVERYONE BETTER OFF

Question 19

By ______ with others, people can buy a greater variety of goods and services at lower cost. Countries as well as families benefit from the ability to trade with one another.

Answer 19

trading

Question 19

Today, most countries that once had centrally planned economies have abandoned this system and are trying to develop market economies.

Answer 19

PRINCIPLE #6: MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE ECONOMIC ACTIVITY

Question 20

______ decide whom to hire and what to make.

Answer 20

Firms

Question 21

________ decide which firms to work for and what to buy with their incomes.

Answer 21

Households

Question 22

Although markets are usually a good way to organize economic activity, this rule has some important exceptions

Answer 22

PRINCIPLE #7: GOVERNMENTS CAN SOMETIMES IMPROVE MARKET OUTCOMES

Question 23

______ are usually a good way to organize economic activity

Answer 23

markets

Question 24

two broad reasons for a government to intervene in the economy:

Answer 24

to promote efficiency and to promote equity

Question 25

refer to a situation in which the market on its own fails to allocate resources efficiently.

Answer 25

market failure

Question 26

refers to the ability of a single person (or small group of people) to unduly influence market prices.

Answer 26

market power

Question 27

One possible cause of market failure is an ___________

Answer 27

externality

Question 28

is the impact of one person’s actions on the well-being of a bystander.

Answer 28

externality

Question 29

Productivity depends on the equipment, skills, and technology available to workers. The relationship between productivity and living standards also has profound implications for public policy.

Answer 29

PRINCIPLE #8: A COUNTRY’S STANDARD OF LIVING DEPENDS ON ITS ABILITY TO PRODUCE GOODS AND SERVICES

Question 30

determinant of living standards

Answer 30

productivity, the amount of goods and services produced per unit of labor.

Question 31

When too much money is floating in the economy, there will be higher demand for goods and services. This will cause firms to increase their price in the long run causing inflation.

Answer 31

PRINCIPLE #9: PRICES RISE WHEN THE GOVERNMENT PRINTS TOO MUCH MONEY

Question 32

If policymakers expand aggregate demand, they can lower unemployment, but only at the cost of higher inflation. If they contract aggregate demand, they can lower inflation, but at the cost of temporarily higher unemployment.

Answer 32

PRINCIPLE #10: SOCIETY FACES A SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT

Question 33

use models as the primary tool for explaining or making predictions about economic issues and problems

Answer 33

Economists

Question 34

This diagram is a schematic representation of the organization of the economy. Decisions are made by households and firms. Households and firms interact in the markets for goods and services

Answer 34

OUR FIRST MODEL: THE CIRCULAR-FLOW DIAGRAM

Question 35

is a curve on a graph that illustrates the possible quantities that can be produced of two products if both depend upon the same finite resource for their manufacture.

Answer 35

OUR SECOND MODEL: THE PRODUCTION POSSIBILITIES FRONTIER

Question 36

is a decision-making tool for managers deciding on the optimum product mix for the company. -demonstrates that the production of one commodity may increase only if the production of the other commodity decreases.

Answer 36

The PPF

Question 37

shows how and why different goods have different values, how individuals and busmcsscs conduct and benefit from efficient production and exchange.

Answer 37

Microeconomics

Question 38

Scope of Microeconomics

Answer 38

1. Theory of Product Pricing 2. Theory of Factor Pricing 3. Theory of Economic Welfare

Question 38

The main objective of microeconomics

Answer 38

is to explain the principles, problems and policies related to the optimum allocation of resources

Question 39

-is an economic theory that states that the price for a specific good or service is determined by the relationship between its supply and demand at any given point. -Market conditions and forces determine the optimal price of goods and services, this means this price reacts to the market

Answer 39

Theory of Product Pricing

Question 40

-Also called theory of distribution. -It deals with the prices paid for factor services (land, labor, capital, entrepreneur) and received by the sellers of factor services. It deals with wage rate, interest rate specific rent and profit. -In short theory of factor pricing studies how rent of land, wages of labor interest on capital and profit of entrepreneur are determined.

Answer 40

Theory of Factor Pricing

Question 41

-The study of how the allocation of resources and goods affects social welfare. This relates directly to the study of economic efficiency and income distribution, as well as how these two factors affect the overall well-being of people in the economy. -seeks to evaluate the costs and benefits of changes to the economy and guide public policy .toward m~reasmg the total good of society, using tools such as cost-benefit analysis and social welfare functions.

Answer 41

Theory of Economic Welfare

Question 42

are two standard branches of modern economics.

Answer 42

Positive and Normative Economics

Question 43

describes and explains various economic phenomena, -is based on fact and cannot be approved or disapproved -a stream of economics that focuses on the description, quantification, and explanation of economic developments, expectations, and associated phenomena

Answer 43

Positive economics

Question 44

focuses on the value of economic fairness or what the economy should be. -is based on value judgments. -Its goal is to summarize the desirability (or lack thereof) of various economic developments, situations, and programs by asking what should happen or what ought to be.

Answer 44

Normative economics

Question 45

-Considers taxes, regulations, and government legislation. -It does not try to explain which actions should take place in a market but rather the effects of changes in certain conditions.

Answer 45

Microeconomics

Question 46

-Analyze entire industries and economies rather than individuals or specific companies. -Determine the optimal rate of inflation and factors that may stimulate economic growth.

Answer 46

Macroeconomics

Question 47

is an economic principle referring to a consumer's desire to purchase goods and services and willingness to pay a price for a specific good or service.

Answer 47

Demand

Question 48

This law states that if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good.

Answer 48

Law of Demand

Question 49

Shows the amount of a good that will be purchased at alternative prices, holding other factors constant.

Answer 49

Market Demand Curve

Question 50

Determinants of Demand

Answer 50

1. The price of the good or service. 2. The income of buyers. 3. The prices of related goods or services—either complementary and purchased along with a particular item, or substitutes and bought instead of a product. 4. The tastes or preferences of consumers will drive demand. 5. Consumer expectations. Most often, this refers to whether a consumer believes prices for the product will rise or fall in the future

Question 51

is when a price decrease causes a significant increase in the quantities bought.

Answer 51

Elastic Demand

Question 52

is when a price decrease won't increase the quantities purchased.

Answer 52

Inelastic Demand

Question 53

refers to the usefulness (utility) of each additional unit the further out on the margin you go.

Answer 53

Marginal Utility

Question 54

Two types of Goods

Answer 54

Normal Goods Inferior Goods

Question 55

A good for which an increase (decrease) in income leads to an increase (decrease) in the demand for that good.

Answer 55

Normal Goods

Question 56

A good for which an increase (decrease) in income leads to a decrease (increase) in the demand for that good.

Answer 56

Inferior Goods

Question 57

2 types of related Goods

Answer 57

Substitues Goods Complement Goods

Question 58

The ______________ demonstrates the quantities that will be sold at a certain price. -Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

Answer 58

Law of Supply

Question 59

the supply relationship shows an _______________.

Answer 59

Upward Slope

Question 60

fundamental economic concept that describes the total amount of a specific good or service that is available to consumers.

Answer 60

Supply

Question 61

The supply curve shows the amount of a good that will be produced at alternative prices.

Answer 61

Market Supply Curve

Question 62

Variables that affect the position of the supply curve are called ______________

Answer 62

Supply Shifter

Question 63

changes in the price of a good lead to a change in the quantity supplied of that good. This corresponds to a movement along a given supply curve

Answer 63

Change in Quantity Supplied-

Question 64

changes in variables other than the price of a good, such as input prices or technological advances, lead to a change in supply. This corresponds to a shift of the entire supply curve.

Answer 64

Changes in Supply

Question 65

The amount producers receive in excess of the amount necessary to induce them to produce the good.

Answer 65

Producer Surplus

Question 66

is the state in which market supply and demand balance each other, and as a result, prices become stable.

Answer 66

Equilibrium

Question 67

is a market state where the supply in the market is equal to the demand in the market.

Answer 67

Market Equilibrium

Question 68

is the price of a good or service when the supply of it is equal to the demand for it in the market.

Answer 68

Equilibrium state

Question 69

is a condition where the quantity demanded is greater than the quantity supplied at the market price. -also called excess demand,

Answer 69

Shortage

Question 70

describes the amount of an asset or resources that exceeds the portion that is actively utilized. -also called excess supply,

Answer 70

Surplus

Question 71

Laws that government enacts to regulate prices are called

Answer 71

Price Controls

Question 72

is the mandated maximum amount a seller is allowed to charge for a product or service. Usually set by law, price ceilings are typically applied only to staples such as food and energy products when such goods become unaffordable to regular consumers.

Answer 72

Price Ceiling

Question 73

the minimum legal price that can be charged in a market. It is a situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply.

Answer 73

Price Floor

Question 74

A measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable.

Answer 74

Elasticity

Question 75

A measure of the responsiveness of the quantity demanded of a good to a change in the price of that good; the percentage change in quantity demanded divided by the percentage change in the price of the good.

Answer 75

Own Price Elasticity of Demand

Question 76

Demand is elastic if the absolute value of the own price elasticity is greater than 1

Answer 76

Elastic Demand

Question 77

Demand is inelastic if the absolute value of the own price elasticity is less than 1.

Answer 77

Inelastic Demand

Question 78

Demand is unitary elastic if the absolute value of the own price elasticity is equal to 1.

Answer 78

Unitary Elastic Demand

Question 79

is perfectly elastic if the own price elasticity is infinite in absolute value. In this case the demand curve is horizontal.

Answer 79

Perfectly Elastic Demand

Question 80

is perfectly inelastic if the own price elasticity is zero. In this case the demand curve is vertical.

Answer 80

Perfectly Inelastic Demand

Question 81

A measure of the responsiveness of the demand for a good to changes in the price of a related good; the percentage change in the quantity demanded of one good divided by the percentage change in the price of a related good.

Answer 81

Cross-Price Elasticity

Question 82

Factors Affecting Own Price Elasticity

Answer 82

1. Available Substitutes 2. Time 3. Expenditure Share

Question 83

is the bedrock on which many managerial decisions are grounded.

Answer 83

Cost analysis

Question 84

______________________ is essential to determining a firm’s current level of profitability.

Answer 84

Reckoning costs accurately

Question 85

__________________ depend on projections of costs at other (untried) levels of output.

Answer 85

profit-maximizing decisions

Question 86

The ___________ is defined as the time frame in which there are fixed factors of production.

Answer 86

short run

Question 87

2 Factors of production

Answer 87

Fixed factor production Variable factor production

Question 88

The __________ is defined as the horizon over which the manager can adjust all factors of production.

Answer 88

long run

Question 89

is simply the maximum level of output that can be produced with a given amount of inputs.

Answer 89

Total product (TP)

Question 90

The _________________ defines the maximum amount of output that can be produced with a given level of inputs

Answer 90

production function

Question 91

The _________________ of an input is defined as total product divided by the quantity used of the input.

Answer 91

average product (AP)

Question 92

The ___________________ returns is a theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output.

Answer 92

Law of diminishing marginal

Question 93

__________________ are cost advantages reaped by companies when production becomes efficient.

Answer 93

Economies of scale

Question 94

Effects of Economies of Scale on Production Costs

Answer 94

1. It reduces the per-unit fixed cost. As a result of increased production, the fixed cost gets spread over more output than before. 2. It reduces per-unit variable costs. This occurs as the expanded scale of production increases the efficiency of the production process.

Question 95

Types of Economies of Scale

Answer 95

1. Internal Economies Scale 2. External Economies Scale

Question 96

These refer to economies of scale enjoyed by an entire industry. For instance, suppose the government wants to increase steel production.

Answer 96

External Economies Scale

Question 97

This refers to economies that are unique to a firm. For instance, a firm may hold a patent over a mass production machine, which allows it to lower its average cost of production more than other firms in the industry.

Answer 97

Internal Economies Scale

Question 98

Sources of Economies Scale

Answer 98

1. Purchasing 2. Managerial 3. Technological

Question 99

Firms might be able to lower average costs by improving the management structure within the firm. The firm might hire better skilled or more experienced managers.

Answer 99

Managerial

Question 100

Firms might be able to lower average costs by buying the inputs required for the production process in bulk or from special wholesalers. By negotiating with suppliers for volume discounts, the purchasing firm takes advantage of economies of scale.

Answer 100

Purchasing

Question 101

A technological advancement might drastically change the production process. For instance, fracking completely changed the oil industry a few years ago.

Answer 101

Technological

Question 102

happen when a company or business grows so large that the costs per unit increase.

Answer 102

Diseconomies of scale

Question 103

Types of Diseconmies Scale

Answer 103

Technical Diseconomies of Scale Organizational Diseconomies of Scale External Diseconomies Scale

Question 104

involve physical limits on handling and combining inputs and goods in process. These can include overcrowding and mismatches between the feasible scale or speed of different inputs and processes.

Answer 104

Technical diseconomies of scale

Question 105

can happen for many reasons, but overall, they arise because of the difficulties of managing a larger workforce. Several problems can be identified with diseconomies of scale.

Answer 105

Organizational diseconomies of scale

Question 106

can result from constraints of economic resources or other constraints imposed on a firm or industry by the external environment within which it operates.

Answer 106

External diseconomies of scale